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| Contrary to popular belief and
Media propaganda, Investing is not a competitive event! Rather, it
is a uniquely personal and goal directed activity that individuals must organize and control for
themselves. By definition, it
is a long term enterprise best dealt with by using the fundamental
principles of two disciplines: Investment and Management.
So as much as you love to hear quarterly growth numbers and
comparisons with this or that average and index over short term
blinks of the investment eye, you will not be accommodated here.
As
explained in "The Brainwashing of the American Investor",
analysis of quarterly, and other calendar year numbers, accomplishes
little while generating transactions that most often damage the
health and long term viability of the investment portfolio.
Performance statistics need to be "apples to apples"
comparisons and no index alive will ever look like a properly
diversified portfolio of high quality, income generating, NYSE
equities combined with
an equally well diversified group of
investment grade fixed income securities. In other words, if you you
plan your Investment Program properly by creating an Asset
Allocation Model that makes sense for you, and fill it up with
Investment Grade Securities, there is just nothing to compare with
save your own personal goals! Whoa, that's the way it's supposed to
be!
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But here's something to
think about: In spite of what the averages and indices told you to believe about
the investment climate from 2000 into 2005, there was absolutely no
reason to lose money. Speculations bombed as they always do, but
quality investments... If you did manage to lose money, you need to re-examine your
approach to investing!
The
"NO" magic
formula? No
NASDAQ, No Mutual Funds, No IPOs = No problem!
Similarly, there are
three major realities in the
Investment World that need to be understood before valid performance
evaluation is possible.
-
The Stock Market cycle (Peak to Trough to Peak
or vice versa) has no relationship at all to a calendar year,
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The Interest Rate Cycle (Low to High to Low) has
no relationship either to the calendar year or (believe it or
not) to the Stock
Market cycle, and
-
The Economic and Business
Cycles have no relationship to the Calendar Year either.
Don't discount these
simplistic observations. Their meaning, when appreciated, can
improve your future performance significantly. Like golf, investing
can be easy (if not simple). A complicated swing is as non
productive as and gimmicky investment products, and a fixation on
"score" in the short run causes mistakes just as surely as
quarterly "bottom line" performance analysis.
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| So what is an investor to do if he
isn't going to just follow the crowd (i.e., by ignoring all of the
blatant inconsistencies between the basics of goal orientated
Investment Management and the ridiculousness of the "Performance Evaluation by the Averages"
Quarterly and Annual statistical fiasco)?
The book to your left, Chapter Five, introduces and explains the unique
Working Capital Model,
and how it makes Investment Portfolio
Performance Evaluation personal. Your Equities are dealt with as
capital gains producers; your Fixed Income Securities as income
generators; and your Working Capital is supposed to go up every year...yes, if you are doing
your investing properly, your "Working Capital" and your
"Base Income" will almost absolutely grow every year!
But you do need to understand the concepts and the terminology, so
read the book. |
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So
when and if I do look at "Market Value" performance,
it will almost never be for a conventional period of
time...especially if "Market Value" is all we have to
deal with. In the late 90's,
when the "Pied Piper" of greed was leading investor
dollars into the Black Hole of the NASDAQ, many of the most conservative investors succumbed to the pressure,
leaving their high quality portfolios behind as they joined
the high tech gold rush. I have compiled Market Value
performance figures for people who stood their High
Quality (no NASDAQ, no Mutual Funds) ground from November of
1999 (about four months before the bubble burst) through
September of 2004. You'll note that this period of time was
considered a total disaster area by Wall Street and the Mutual
Fund Industry. Take a look at how your experience would have
differed with the "NO MAGIC" formula introduced
above. |
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Before there was performance evaluation,
there were expectations; and before there
can be valid expectations, there must be a basic understanding
of securities!
The stock market
is, and always will be a volatile place where even the best and
most profitable companies can be expected to rise and to fall in
Market Value. Similarly, fixed income securities will always
rise and fall in price as interest rate change expectations...
change. The factors that affect these normal and
harmless fluctuations are many and mostly unpredictable, so the
investment task is to understand this and to work within it.
For, as much as we may try, we just can't change
Mother Nature... yeah, she's everywhere.
Work on the
understanding of how Equity and Fixed Income market prices react
to certain events in finance and in the economy. Then, create a
portfolio that you can see through. What?
(You
can see and name individual securities. Mutual Funds are
securities containers that you can't open up to have a look at.)
Then learn how to create a cost based asset allocation, and
you'll be close to understanding how important it is to identify
valid expectations. Now
you're ready for the
"Working Capital Model"
for Performance Evaluation.
Learn how to use it and the job is done!
I've heard a rumor that
adapting your financial swing to the Working Capital Model will
actually improve the other (more important?) one.
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